If you were in the full-time workforce in 1980, you likely remember when the 401(k) plan came on the scene. Up until that time, pensions were the retirement vehicle of choice, but as pensions became more costly, the 401(k) became the plan of choice and by 1990, it was commonplace in private sector employee benefit plans. As of the early 1990s, 401(k)s had an estimated $900 billion in assets.

SEE: The 4-1-1 On 401(k)s
By 2011, that number had ballooned to $4.3 trillion, but something else had ballooned as well: the fees. As of 2010, plan administrators were charging more than $85 billion in management fees and as more baby boomers find themselves closer to retirement, they're noticing that they aren't as prepared for retirement as they thought they would be, and a portion of the problem may be found in the fees.

How important are the fees? According to the Vanguard Group, for every .5% in fees, a person will have 10% less in their 401(k) after 30 years of work. For this reason, workers need to closely monitor the fees they're paying for their 401(k).

SEE: 401(k) Fees You Need To Know

A Mattress
We've all heard how difficult it is to make side-by-side comparisons of mattresses, because different model numbers are manufactured for individual stores. To some degree, that's also the case with 401(k)s. Plans are often put together by the employer and the plan administrator, but until now, not all fees that are passed on to the individual employee have been disclosed.

Under new laws set to go in to effect by the beginning of April (Although it could be pushed back), all fees being passed on to the employee must be disclosed in an easy-to-read format, so employees can compare the efficiency of their choices. The company administering the plan will also have to disclose how they are collecting the fees. That may include billing the plan, deducting the fees from the employee's gains or taking a percentage off the plan's total return.

The Benefits
Experts believe that by disclosing the fee structure, more companies will include more passively managed funds that tend to be much lower in fees than actively managed funds, which employ investors who try to beat the overall market yet show only marginal success over the long term.

According to the Huffington Post, adding a wider range of passively managed index funds could come with a large benefit. One study found that a retirement account could be up to $450,000 larger if a predominance of index funds with low fee structures were used. Under new disclosure laws, those without sophisticated financial knowledge would finally be able to compare the various offerings using the easy to understand information disclosed.

The Bottom Line
Not sure what you're being charged with your current 401(k) holdings? Current laws require that certain fees be disclosed already. Request a prospectus for each of your funds or look for the information online. Consider keeping at least around 20% of your allocation in a passively managed index fund that is probably already offered.

Your employer will soon be required to disclose to you all fees associated with your plan. Once that information is provided to you, take some time to read through it and make changes to your plan based on that knowledge. Better yet, pay a fee-only investment advisor a one-time fee to examine your 401(k) and recommend changes.

SEE: Paying Your Investment Advisor - Fees Or Commissions?

Related Articles
  1. Investing Basics

    Understanding Brokerage Fees

    Agents charge brokerage fees for facilitating transactions between buyers and sellers.
  2. Retirement

    Infographic: How Much Money Do You Need to Retire in Hawaii?

    In this infographic we break down cost of living in Honolulu, Hawaii in terms of taxes, rent, food and other expenses and offer comparison to the cost of living in New York, Los Angeles, San ...
  3. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  4. Term

    What are Pension Funds?

    A pension fund is a company-sponsored fund that provides income for employees in retirement.
  5. Mutual Funds & ETFs

    5 Mutual Funds that Hold Berkshire Hathaway Stock

    Discover the top five mutual funds most heavily weighted with Berkshire Hathaway stock, and the percentage of their assets dedicated to BRK.
  6. Mutual Funds & ETFs

    3 Mutual Funds that Hold Google Stock

    Discover the top three mutual funds that dedicate the largest percentage of their total assets to Google, Inc. stock.
  7. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  8. Mutual Funds & ETFs

    4 Mutual Funds that Hold Tesla Stock

    Obtain information on the four mutual funds that have significant allocations to Tesla Motors, Inc. in their major portfolio holdings.
  9. Mutual Funds & ETFs

    4 Mutual Funds that Hold Apple Stock

    Discover mutual funds offering the most substantial percentage of holdings in Apple, Inc. stock that investors can use to get significant exposure to Apple.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth ...
  3. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  4. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  5. Systematic Manager

    A manager who adjusts a portfolio’s long and short-term positions ...
  6. Unconstrained Investing

    An investment style that does not require a fund or portfolio ...
RELATED FAQS
  1. Are mutual funds considered retirement accounts?

    Unlike a 401(k) or Individual Retirement Account (IRA), mutual funds are not classified as retirement accounts. Employers ... Read Full Answer >>
  2. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  3. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  4. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  5. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  6. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!